U.S. has begun to drain liquidity

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I just received notice that the FDIC Board has approved the phase out of the Temporary Liquidity Guarantee Program (TLGP) in a first clear sign that the U.S. Federal Government has started policy normalisation.

The FDIC Board today adopted a Notice of Proposed Rulemaking (NPR) that reaffirms the expiration of the debt guarantee component of the Temporary Liquidity Guarantee Program (TLGP) on October 31st, 2009. Under the NPR, the Federal Deposit Insurance Corporation will seek comment on whether a temporary emergency facility should be left in place for six months after the expiration of the current program.

“The TLGP has been very effective at helping financial institutions bridge the uncertainty and dysfunction that plagued our credit markets last fall,” said FDIC Chairman Sheila C. Bair. “As domestic credit and liquidity markets appear to be normalizing and the number of entities utilizing the Debt Guarantee Program has decreased, now is an important time to make clear our intent to end the program. It is also important to note that the FDIC has collected over $9 billion in fees associated with this program. The FDIC will be using some of this money to off set resolution costs associated with bank failures.”

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I view this announcement as confirmation that the Obama Administration sees the financial crisis as over and is declaring victory.  I would anticipate other policy announcements from the Administration and/or Federal Reserve to reflect this view.

Just yesterday Zero Hedge reported that the money stock is now falling, another clear sign that the excess liquidity about which inflation hawks have been concerned is being drained. In the main, one should take this premature ‘tightening’ bias as bearish for equities and bullish for government bonds.

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While I had anticipated the Fed and the Obama Administration would be loath to cut the recovery short and would maintain accommodative fiscal and monetary stances, this announcement is the first contrary indicator.

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